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CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product (GDP)
Describe what the gross domestic product measures.
Learn two ways to calculate the gross domestic product, and explain why they are equivalent.
Objectives
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product (GDP)
economygross domestic product (GDP)consumption investmentaggregate expenditureaggregate income
Key Terms
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE3
The National EconomyNational economics, or macroeconomics,
focuses on the overall performance of the economy.Economy describes the structure of
economic activity in a locality, a region, a country, a group of countries, or the world.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE4
Gross Domestic ProductGross domestic product (GDP)
measures the market value of all final goods and services produced in the United States during a given period.GDP includes production in the United
States by foreign firms.GDP excludes foreign production by U.S.
firms.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE5
National Income AccountsOrganize huge quantities of data collected
from a variety of sources across the United StatesKeep track of the value of final goods and
services
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE6
No Double Counting Intermediate goods and services are those
purchased for additional processing and resale. Sales of intermediate goods and services are
excluded from GDP to avoid the problem of double counting.
GDP also ignores most of the secondhand value of used goods, such as existing homes and used cars.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE7
Calculating GDPGDP based on the expenditure approachGDP based on the income approach
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE8
GDP Expenditure Approach The expenditure approach to GDP adds up the spending
on all final goods and services produced in the economy during the year.
Consumption consists of purchases of final goods and services by households during the year.
Investment consists of spending on new capital goods and additions to inventories.
Aggregate expenditure equals the sum of consumption, investment, government purchases, and net exports.
C + I + G + (X – M) = GDP
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE9
GDP Income ApproachThe income approach to GDP adds up the
aggregate income earned during the year by those who produce that output.Aggregate income equals the sum of all
the income earned by resource suppliers in the economy.
= GDP Aggregate income=Aggregate expenditure
CONTEMPORARY ECONOMICS © Thomson South-Western
11.1 Estimating Gross Domestic Product SLIDE10Computation of Value Added
for a New Wooden Desk
Stage of Production
(1)Sale Value
(2)Cost of
Intermediate Goods(3)
Value Added
Logger $ 20 — $20
Miller $ 50 $ 20 $30
Manufacturer $120 $ 50 $70
Retailer $200 $120 $80
Market value of final good $200Figure 11.2
CONTEMPORARY ECONOMICS © Thomson South-Western
Identify what types of production GDP calculations neglect.
Determine why and how to adjust GDP for changes over time in the general price level.
Objectives
11.2 Limitations of GDP Estimation
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation
depreciationnominal GDP real GDPconsumer price index (CPI)
Key Terms
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE3
What GDP MissesHousehold productionUnderground economyLeisure, quality, and varietyDepreciationGDP does not reflect all costs
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE4
Household ProductionBecause official GDP figures ignore most
home production, these figures understate actual production in economies where families do more for themselves and buy less in the market.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE5
Underground EconomyThe underground economy includes
activity that goes unreported either because it’s illegal or because those involved want to evade taxes on otherwise legal activity. The underground economy also is called
the black market or “working off the books.”
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE6
Leisure, quality, and varietyGDP fails to capture changes in leisure
time. GDP also often fails to reflect changes in
the quality of existing products and the availability of new ones. These factors make GDP a less-reliable
measure of an economy’s standard of living.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE7
DepreciationDepreciation measures the value of the
capital stock that is used up or becomes obsolete in the production process. Gross domestic product is called “gross”
because it does not take into account this depreciation.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE8
GDP Does Not Reflect All CostsNegative externalitiesBoth GDP and net national product ignore
the depletion of natural resources.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE9
Adjusting GDP for Price ChangesNominal GDP versus real GDPPrice indexesConsumer price indexGDP price index
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE10
Nominal GDP Versus Real GDPNominal GDP is the economy’s output
based on the prices at the time of the transaction; current-dollar GDP.Real GDP is the economy’s aggregate
output measured in dollars of constant purchasing power; GDP measured in terms of the goods and services produced.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE11
Price IndexesAn index number compares the value of a
variable in a particular year to its value in a base year, or reference year.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE12Example of Price Index
(Base Year = 2002)
Year
(1) Price of Bread in Current Year
(2) Price of Bread in Base Year
(3) Price Index
(3) = (1)/(2) × 100
2006 $1.25 $1.25 1002007 $1.30 $1.25 1042008 $1.40 $1.25 112
Figure 11.3
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE13
Consumer Price IndexThe consumer price index (CPI)
measures changes over time in the cost of buying a “market basket” of goods and services purchased by a typical family.The CPI is reported monthly, based on
prices from thousands of sellers across the country.
CONTEMPORARY ECONOMICS © Thomson South-Western
11.2 Limitations of GDP Estimation SLIDE14
GDP Price IndexThe GDP price index includes all goods
and services produced.
GDP price index =Nominal GDP
Real GDP × 100